From there, Montier and Hussman conclude that record high profit
margins are largely attributable to fat government deficits and
depressed household savings. Indeed, that relationship appears to
form a pretty tight correlation as seen in the chart from Hussman
you see above.

Conversely, when deficits shrink and savings rise, profit margins
will be toast.

The Rebuttal

However, not everyone agrees with that conclusion.

"S&P profit margins are high from structural reasons, not
because of the deficit," argued Deutsche Bank's David Bianco, a
strategist who has
long argued that margins are sustainable.

"This construct assumes that no savings are recycled as
investment," he said. "This is not a small matter."

To be clear, Bianco doesn't explicitly identify Montier nor
Hussman. Just their work.

He continued: "Simply said, the notion that savings
reduces investment is a bold claim that runs contrary to basic
macro economics. The continued extension of this
misguided framework to the view that government deficits add to
profits overlooks that someone's borrowing (for temporarily
higher consumption or investment expenditure) is someone's
savings (temporarily lower consumption or less direct investment
expenditure, ie real assets, for indirect investment instead, ie
financial assets)... In our view, profits are not a
function of the degree to which households give back their wages
as expenditures on consumption. This is a very flawed concept.
This framework suggests zero sum economic terms and that savings
are unproductive."

You can almost hear Bianco pounding the table.

For some context, Bianco is no raging bull on the stock market
right now. As of his May 2 research note, his year-end target for
the S&P 500 was 1,850 and he expects the next 5%+ move to be
down.

Here's Bianco's full comment on the profit margin matter from his
April 13, 2014 note:

S&P profit margins are high from structural reasons,
not because of the deficit

S&P profits and margins recovered back to pre-crisis level by
2011. This led many to believe a well circulated argument that
deficit boosted S&P profits. The crux of this specious
argument that profit margins are boosted by a high government
deficit and low household savings rate rests on the over
simplification of “Profits = Investment + Consumption – Wages” to
“Profits = Investment – Household Savings”.

This construct assumes that no savings are recycled as
investment. This is not a small matter. It represents a major
conceptual flaw in this framework, which taints the entire
analysis. The equation above would only be correct if all savings
were stuck in a Keynesian liquidity trap. This is neither the
point of the argument nor the general condition, thus the
equation above fails to recognize that: Investment = Savings.

Income not spent on consumption expenditures usually goes into
investment expenditures. Incorporating this normal condition
negates the conceptual leap from the easily accepted "Profits =
Investment + Consumption - Wages" to "Profits = Investment -
Household Savings" as the latter expression of the former
equation fails to acknowledge that profits are a source of
household income. This ignores the real world relationship that
exists in the economy of profits supporting consumption, but more
importantly that profits also support a big portion of
investment. Dividends might be added to the tail of the equation,
but this doesn't suffice because even earnings retained by
companies and proprietorships are invested on behalf of owners.

Simply said, the notion that savings reduces investment is a bold
claim that runs contrary to basic macro economics. The continued
extension of this misguided framework to the view that government
deficits add to profits overlooks that someone's borrowing (for
temporarily higher consumption or investment expenditure) is
someone's savings (temporarily lower consumption or less direct
investment expenditure, ie real assets, for indirect investment
instead, ie financial assets). In short, the government and
foreign variables can be set aside. What this really comes down
to is: Are Profits = Investment - Household Savings?

In our view, profits are not a function of the degree to which
households give back their wages as expenditures on consumption.
This is a very flawed concept. This framework suggests zero sum
economic terms and that savings are unproductive. In our
preferred conceptual framework, investment drives growth. If
households consume less then they invest more. Thus, profits are
a function of cumulative past savings and the return on such
capital stock as determined by risk and the competitive forces
between labor and capital.